Officially, the central bank is moving to the free-floating ruble. Kinda surprising for a petrocurrency, but the bank’s recent actions should be seen from this perspective.

The other important point concerns political consequences of exchange rate changes. The Russian general government budget infamously depends on oil prices. Falling oil prices have two effects. First, it’s a net loss because fossil fuels get sold for less. Second, the Russian tax system ensures that the central (federal) government remains a relative winner. Oil and gas exporters pay taxes proportionally to their forex revenues and pay them in rubles to the central government. Changes in exchange rates compensate the loss of dollar revenue, so the federal budget escapes a huge deficit. The central government is even a bigger winner under the free float regime, when the ruble rapidly depreciates after sanctions and declining oil prices:

Given the float currency policy and central government interests, the strong ruble has no strong supporters in Russia. The central bank spent $110 bn. trying to avoid sharp moves in exchange rates. People and businesses massively get rid of rubles when they discover vertical hikes in rates, which are familiar after hyperdepreciation of the 1990s. Government tried to avoid the side effects of rapid changes in exchange rates: bank runs, inflation, and underinvestment.

The central bank sold about 20% of its forex reserves in a year. Meanwhile, the ruble did depreciate with all those undesirable effects. Was it a good idea to free the ruble when (a) state-owned corporations were seeking new sources of capital due to sanctions, (b) oil prices fell rapidly to decade-long lows, (c) uncertainty around Ukraine put pressure on the ruble, (d) import required time to respond to current balance hit by new oil prices? The market needed dollars to soften these shocks. Instead, the central bank quitted in the middle of the game with $500 bn. in forex reserves (25% of nominal GDP).

If not in crisis, what’s a better time for a central bank with a free-floating currency to spend reserves? An even worse crisis! It’s better to be wrong on this, of course, and instead, to assume that government just got the ruble down as smoothly as it could.